Money Means guides are brought to you by FSCS, the people who protect your money from £1 up to £85,000 in UK banks, building societies and credit unions. Find out more.

 

With the base rate still frozen at 0.25%, it’s still important to make your money work as hard as it possibly can for you. The problem is, this is no mean feat with the level of prices for goods and services (inflation) at 2.3%. This is its highest level in more than three years, and above the Bank of England’s 2% target. 

 

That said, it’s still important to make your money work as hard as it possibly can for you.

 

Higher inflation has implications not just on the everyday cost of living, but also on our cash savings, as a low interest-rate and rising inflationary environment is a toxic combination; it means that those with money squirreled away are being squeezed from all sides.

 

And, with speculation that inflation could rise even further, things could get even worse.

 

In fact, figures from Chelsea Financial Services show that if inflation reaches 3% and interest rates don’t rise, £100 could be the equivalent of just £93.26 in three years’ time. If it gets as high as 4%, the buying power of £100 will fall to just £88.47.

 

So what can savers do? In the past, people have looked to cash individual savings accounts (ISAs).

 

However, these vehicles have taken quite a battering since the introduction of the Personal Savings Allowance a year ago. With this allowance, basic-rate taxpayers can now earn £1,000 before paying tax – and higher-rate taxpayers can earn £500 – meaning a lot of taxpayers no longer pay any tax on their savings income.

 

While cash ISAs may no longer be the go-to solution for many, it’s important not to give up hope, as there are a range of options to make your money work harder for you.

 

Here we take a closer look at some of the ways you can grow your money despite everything that’s going on.

 

 

Cash in on a high-paying current account

Right now, current accounts are one of the few places where you can earn interest that beats the inflation rate of 2.3% – with the added bonus of being able to access your cash whenever you need it. However, interest is limited to smaller amounts.

 

For example, Nationwide is paying a generous 5% on its FlexDirect account (on balances up to £2,500 for the first 12 months), Tesco Bank is paying 3% (on balances up to £3,000), and TSB is paying 3% (on balances up to £1,500).

 

But you will only get these high rates if you meet specific Ts and Cs, such as monthly funding requirements.

 

What protection is in place? All UK-regulated current accounts – and savings accounts – are covered by the Financial Services Compensation Scheme (FSCS) which offers £85,000 protection per institution if your bank or building society goes bust.

 

 

Peer-to-peer lending (P2P)

Rather than leave cash in a savings account, those looking for high returns could invest inpeer-to-peer (P2P) lending.

 

Online platforms such as Zopa, Ratesetter and Lending Works allow individuals to lend cash to each other and earn a higher rate of interest than is otherwise available from cash accounts.

 

Recent rates include 3.8% for 30-day notice money with Ratesetter and 3.9% for a one-year fund.

 

What protection is in place? Money held with a P2P lender is not protected by the FSCS, the UK’s statutory compensation scheme.

 

 

Pay down debts while rates are low

Another good option for those looking for a home for their money right now is using it to reduce debts.

 

You might, for example, want to think about clearing your credit balance or overdraft, or making overpayments on your mortgage while rates are low.

 

What you need to remember is that if you are paying more interest on your debts than you’re earning on your savings, you get a better effective return by reducing your debt.

 

But if you go down this route, you must ensure you have enough left over in an emergency fund that you can access quickly if you need to.

 

What protection is in place? Not applicable.

 

 

Start investing

If you’re searching for higher returns than a savings account can offer, you could also consider investing.

 

But while turning to the stock market could be a more attractive proposition right now, it isn’t a decision that should be taken lightly, as you could end up with less than you originally put in.

 

That said, stocks and shares ISAs – also known as investment ISAs – have the potential to grow more than cash savings, provided you can invest for the long term and hold your nerve along the way.

 

They also typically offer better protection against inflation than cash ISAs.

 

The ISA limit has just increased, and you can now slot away a huge £20,000 a year in a stocks-and-shares ISA (or combination of cash and stocks-and-shares ISAs). Any growth you achieve is free of tax.

 

If you’ve never invested before, the thought of stocks and shares can feel quite daunting and complex when compared to the simplicity of a savings account.

 

But the key is to tread carefully. Decide what you want to achieve, how long you are planning to invest for, and how much risk you are prepared to take.

 

You also need to do your homework or take advice. You can find an adviser via a site such as Unbiased.co.uk or Vouchedfor.co.uk.

 

What protection is in place? The level of FSCS protection for investments is £50,000 – lower than the £85,000 limit for cash savings.

 

 

Further tips to help your grow your money

*don’t leave your savings stagnating in a poor-paying account. Shop around for the best rates you can find, and take advantage of higher rates on fixed-rate bond and regular saver accounts. Useful sites for comparing rates include Savingschampion.co.uk and Moneyfacts.co.uk.

 

*note that some of the “best buy” savings deals may be offered by lesser-known banks, but as long as these names are part of the FSCS – or European equivalent – there is no need to ignore them.

 

*if you sign up to a current account offering an introductory deal, put a note in your diary to remind yourself to scour the market again once the deal ends.

 

*if you are simply fed up with low rates on cash savings but would endure sleepless nights worrying about the prospect of losing money, the stock market is not for you. You are better off putting up with poor cash returns and sleeping peacefully knowing your money is safe.

 

*if you are happy with the idea of putting money into the stock market, you can reduce the risk of market timing by investing regular premiums on a monthly basis, rather than putting in a lump sum.

 

*if you are saving for the long-term, a workplace pension is one of the best ways to grow your savings and prevent them from being eaten away by inflation. Not only do you receive a top-up from the Government in the form of tax relief, your employer is also likely to put money into your pot – helping to turbo-charge your savings.

 

*an alternative way to beat inflation is by fixing your bills so they do not increase for the foreseeable future. For example, as a homeowner, you could look to fix your mortgage for five years. This will inflation-proof at least part of your monthly outgoings – protecting you from the rising cost of living.

9/8/2017 2:31:34 PM